The PCAOB in Transition


Thank you, Director Kucic, for the opportunity to be with you this afternoon. My remarks today are my own and do not reflect the views of the Public Company Accounting Oversight Board ("PCAOB").

Public Service

At the outset, I would like to say a few words about our moderator, Lynn Turner. I met Lynn when he was Chief Accountant at the SEC and I was Staff Director and Chief Counsel for the Senate Banking Committee, serving under Chairman Paul Sarbanes. Working with former SEC Chairman Arthur Levitt, Lynn was instrumental in helping to craft the Sarbanes-Oxley Act of 2002 and the framework for the PCAOB. Since then, he has been an important member of the PCAOB's Standing Advisory Group and Investor Advisory Group.

I think it is fair to say that there is no stronger individual advocate of investor protection in the United States today than Lynn Turner. While we do not always agree on issues — and I expect that we will get into some of them during the question and answer session — I respect his intelligence, integrity and passion.

He follows in the tradition of another legendary SEC Chief Accountant, John or "Sandy" Burton. Sandy died earlier this year in May. A former Dean of Columbia Business School, Sandy was a fervent advocate of transparency in financial reporting and for a greater role of accountants in public life. Sandy was a prolific author and among other things, he wrote that "the concept of audit must be expanded" and that "We must … get across the idea that accountants are not primarily record keepers and checkers, but measurers of economic and social phenomena whose measurements can significantly influence the allocation decisions of our society."

So, one of the reasons I am pleased to be here is in order to encourage you, at some point in your careers, to use your considerable skills, as Lynn and Sandy have, in the policy making arena. Washington desperately needs people with financial and accounting backgrounds and training to help sort out the numerous problems our country faces in the areas of responsible government spending and in the oversight of our markets and economy. I believe that having trained accountants involved throughout all levels of the public policy decision-making process is needed more than ever today and would result in more informed and unbiased governmental policies and programs.


Congress clearly recognized the importance of accounting and auditing both to private businesses and to the integrity of this country's securities markets when it established the Public Company Accounting Oversight Board and gave the Board the mandate "to protect the interests of investors and further the public interest in the preparation of informative, accurate and independent audit reports."

The PCAOB is required to:

  • Register accounting firms that audit either companies whose stock is traded in the United States, or brokers or dealers;
  • Establish auditing and other professional standards;
  • Conduct periodic inspections of registered accounting firms and report the results of those inspections;
  • Conduct investigations of possible violations by auditors of the securities laws, PCAOB standards or rules, or SEC rules; and
  • Conduct disciplinary proceedings and impose appropriate disciplinary or remedial sanctions on a firm or individual who commits a violation of those laws, standards or rules.

Therefore, the PCAOB registers the auditors, sets the rules for the auditors, "audits" and reports on the auditors, and, when necessary, disciplines the auditors. As of August 2010, 2,433 auditing firms were registered with the PCAOB, of which 924 are foreign firms. We have a staff of 629 employees and a fiscal year 2010 budget of $183 million. Since 2003 the Board has conducted more than 1,300 inspections, and we currently have an aggressive standard setting schedule and a busy enforcement caseload.

I was appointed to the PCAOB in June 2008 and am its newest member. I believe the Board, since its inception in 2002, has done an outstanding job of building a highly credible organization, which is respected by both investors and the auditing profession alike. But, the PCAOB currently is an agency in transition. Shortly, the Securities and Exchange Commission is expected to appoint three new Board members out of a total of five. This gives the Commission a tremendous opportunity to influence future Board policy and for new Board members to focus on important and evolving policy issues.

I expect that fairly soon after the new members arrive the Board will re-evaluate its strategic plan and decide whether there should be any changes in emphasis or direction of the Board's programs. For example, the newly constituted Board is likely to look at the Board's own operations and decide whether to change: how we evaluate firms' efforts to remediate their practices in response to the comments made in the Board's inspection reports - this has been a top priority of mine; how we should implement the Board's new statutory authority to oversee audits of brokers and dealers; how to address issues related to the inspection of foreign accounting firms; and how to deal with the complexity in accounting and auditing standards.

The new Board members also will likely be confronted with a need for better access to the firms' global networks; growing concerns about the growth of non-audit services that could impair firms' independence from their audit clients; and requests from investor groups and others that the Board address many of the recommendations of the Treasury Department's Advisory Committee on the Auditing Profession.

Transparency and Accountability

I will touch briefly on each of these topics, but first I want to note the two overriding principles that have guided my work at the Board and will continue to guide my work after the new Board members arrive -namely, the need for greater transparency and accountability.

Transparency is essential. I believe it is critical that in the course of the PCAOB's decision-making process we keep the public informed of our activities and that we hear from all interested parties. In this vein, the Board recently asked Congress to open up our disciplinary hearings to the public to be more in line with the practices of other, comparable regulators, so investors, audit committees, auditors and the public in general may see, to a greater extent, how we run our enforcement program.

Since I view the investor community as the primary stakeholder of the PCAOB, I am most appreciative of the fact that former Chairman Mark Olson asked me to Chair the PCAOB's Investor Advisory Group. I believe it is important to institutionalize investor representation both domestically, and internationally at the International Forum of Independent Audit Regulators. Discussions with these groups provide for more transparency into the Board's operations, allow the members of these groups to tell us about their experiences and ideas, and help to inform the Board's decisions in almost all of our program areas.

I also believe in rigorous accountability. I believe the Board is accountable to American investors for everything we do. I also believe that accounting firms and individual auditors should be held accountable and that, in line with that point of view, audit engagement partners should sign audit reports; individuals should sign their names, and not just the firm's name, to letters to the PCAOB; and supervisors should be held accountable for failing to supervise. Under section 302 of the Sarbanes-Oxley Act, the principal executive officer of a public company is required to sign certain reports filed with the SEC and I believe the same sense of accountability should apply to the managing partners of auditing firms.

PCAOB Operations

As I noted, some of the most immediate operational issues the Board faces include the Board's remediation process, oversight of the audits of brokers and dealers, the inspections of foreign firms, and the complexity in accounting and auditing.

The remediation issue arises because under the Sarbanes-Oxley Act any audit firm that PCAOB inspectors criticize for defects in its quality control system has 12 months after the date of the inspection report to address, or remediate, those deficiencies to the Board's satisfaction. If the Board is not satisfied that the deficiencies are being addressed, then the quality control deficiencies described in the report are made public. With some firms, however, we have seen similar quality control criticisms reappear year after year after year in our inspection reports. I believe that both the PCAOB and the inspected firms must improve our evaluations of the underlying root causes of the problems that result in these recurring concerns, and take more timely steps to assure the implementation of appropriate remedial actions.

Issues related to the conduct of PCAOB inspections of foreign firms located in the European Union as well in other jurisdictions such as China and Switzerland present additional challenges. In the recent past, it has been difficult for the Board's staff to enter those countries to conduct inspections notwithstanding the fact that Section 104 of the Sarbanes-Oxley Act specifically requires the Board to inspect registered firms that regularly issue audit reports. Recently, the European Commission issued a decision that permits the individual EU audit regulators to enter into bilateral arrangements for inspections with the PCAOB but, unfortunately, the EC decision also puts several new conditions on those arrangements and it is unclear at this time whether we will be able to reach agreement and actually start inspections. As you may imagine, these are extremely complicated issues that require careful consideration by the Board in close consultation with the SEC.

Issues related to remediation and foreign inspections have been before the Board for some time, but the oversight and inspection of broker-dealer auditors is a new area for the Board. The Sarbanes-Oxley Act has required auditors of brokers and dealers to register with the PCAOB, but that Act did not give the PCAOB authority to inspect audits of nonpublic broker-dealers. The Dodd-Frank Wall Street Reform and Consumer Protection Act, which became law on July 21, 2010, grants authority to the PCAOB to establish standards, inspect, investigate, and when necessary bring disciplinary actions regarding audits of brokers and dealers. The Board is in the early stages of developing programs in each of these areas.

As we develop new programs for the oversight of audits of broker-dealers, and as we continue to oversee the audits of public companies, I believe we have to keep in mind that too many regulations, and overly complex regulations and standards, may not be in the best interest of investors. For those of you who are students, I don't need to explain that the world of accounting and auditing is filled with complex standards and regulations. Both when I worked on the Hill and as a member of the PCAOB, I have been concerned that American businesses and American professionals are being overburdened with an ever-expanding array of long, detailed and, at times, inconsistent rules and regulations. As a regulator at the Board, my goal is to oversee an effective and efficient audit process. I believe that by simplifying and streamlining standards and regulations, and by avoiding complexity to the extent possible, we can end up with more effective regulations, more effective audits, and more investor confidence in the audit and financial reporting processes.

Changes at Accounting Firms

The issues related to remediation, broker-dealers, foreign inspections, and complexity are primarily focused on the Board's internal operations. But the Board also is evaluating changes at accounting firms and, particularly when the new Board members arrive, will have to make decisions about what regulatory reactions to those changes, if any, are appropriate. These issues have to do with the firms' global networks, potential threats to auditor independence, and issues that were discussed by the Department of Treasury's Advisory Committee on the Auditing Profession.

I believe that the Board needs to have a better understanding of the largest firms' global networks, including their governance, sustainability, and how they monitor and ensure their members' audit quality.

Shortly after arriving at the PCAOB, I was struck by a statement I read by the then head of the International Forum of Independent Audit Regulators, Paul Boyle. Discussing the audit regulatory environment, he said, "The first regulatory gap is that the firms which manage the international audit networks are currently not subject to regulation or oversight. As a first step we should consider improving our knowledge of the structure, operations and governance of the networks." Ever since, I have been concerned about this issue. In light of the fact that the four largest public accounting firms (including their foreign affiliates) audit approximately 97% of the global market capitalization, the influence over the audit process asserted by those running the international networks is vitally important to the smooth functioning of our capital markets. We need a better mechanism to address this regulatory gap.

Another important issue, in both the domestic and international arenas, is auditor independence. A core issue the Sarbanes-Oxley Act dealt with involved prohibiting auditors from contemporaneously auditing and providing certain consulting services to the same client. Following enactment of that Act, there was a significant reduction in the volume and type of non-audit services provided by firms to their audit clients. More recently, however, on a global basis, many auditing firms again reportedly have begun to acquire or affiliate with non-audit service providers, or to aggressively grow their existing non-audit service offerings organically. While it is perhaps not surprising that firms are working aggressively to offset slowing or declining audit revenues with other services, it is critically important that the profession not regress, or in any way begin to compromise auditor independence. In this economic environment, firm management must ensure that the tone from the top is clear and unambiguous — namely that every member of the firm should vigilantly guard against a loss of even the appearance of its independence from any audit client. I think it is essential that the PCAOB continue to monitor aggressively all auditor independence issues to determine whether additional action by the Board is necessary.

Treasury Advisory Committee on the Auditing Profession

And speaking of the examination of issues affecting the auditing profession, I hope that somewhere in your studies you will spend some time on the report and recommendations of the Treasury Advisory Committee on the Auditing Profession. In 2007, then Treasury Secretary, Hank Paulson, established an Advisory Committee on the Auditing Profession, co-chaired by Arthur Levitt, and Don Nicolaisen. Arthur Levitt was Chairman of the SEC during the Clinton Administration, and had been head of the American Stock Exchange and a prominent investment banker on Wall Street. Don, in addition to also having served as Chief Accountant at the SEC in the Bush Administration, was a partner at PriceWaterhouseCoopers and a member of a number of prestigious boards of directors. The Committee was comprised of individuals representing a broad cross-section of interests. I don't think anyone can legitimately accuse a Hank Paulson-Arthur Levitt- Don Nicolaisen-led Committee of being overly partisan or political. Lynn Turner, as a former auditor, CFO and regulator, and a current member of several audit committees, also was a member of that Advisory Committee.

The Advisory Committee's report was published in October 2008 and directed a number of specific policy recommendations to the PCAOB. The PCAOB is in the process of acting upon a number of these recommendations but most of the most important ones — at least from my perspective — await the arrival of the new PCAOB Board members for further consideration and action. I am hopeful that the SEC will appoint new Board members who will want to pursue all of them.

Some of the more important outstanding recommendations include:

  • Improving the transparency of audit firms, including requiring the largest firms to submit audited financial statements to the PCAOB on a confidential basis,
  • Monitoring sources of catastrophic risk to audit firms,
  • Improving the auditor's report,
  • Requiring the engagement partner's signature on the audit report, and
  • Appointing independent members to serve on audit firms' boards.

Many of these subjects already have been dealt with abroad and I see no compelling reason for us not to address them here in the United States - and I would hope this would be a top priority of our new Board.


In conclusion, while I have raised a number of pending issues, I believe the PCAOB remains deeply committed and strives every day to successfully fulfill our mandate "to protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws."

I look forward to your questions and to our roundtable discussion.

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